Will Obama’s Tax Overhaul Boost Stocks?

By Sarah Morgan

The Obama administration’s plan to revamp the corporate tax code could be a boon to industries which don’t rely on tax breaks, experts say. It might even boost stocks.

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Because much of the plan announced Wednesday focuses on eliminating certain types of tax breaks corporations currently enjoy, investors could look for winners among the companies that don’t get a lot of subsidies or other breaks now, analysts say. “Look at the industries that have the highest effective tax rates, those are the industries that stand to benefit the most,” says Brian Gardner, a senior vice president of Washington research at Keefe, Bruyette & Woods. Financial services firms would likely stand to gain from the proposed reduction in the corporate income tax rate from 35% to 28%, Gardner says. “As a group, they’d be losing fewer exemptions and deductions and subsidies than others, so they would be a net beneficiary,” he says. Industries that enjoy subsidies now, particularly energy, would be more likely to take a hit, he says.

Of course, this proposal is just that: a proposal. And in an election year, observers say there’s little chance we’ll actually see a complete overhaul of the corporate tax code. “The political prospects for all of this happening this year are somewhere between slim and none,” Gardner says. Comprehensive reform like this is far more likely to happen after the presidential election, not before it, he says.

If the plan does pass, this year or next, it could also affect multinational and domestic manufacturing stocks. The president proposes to tax companies on income earned overseas, which observers say has the potential to erode the benefit companies now get from sending operations — and jobs — outside of the U.S. That might make smaller U.S. manufacturing companies relatively more attractive compared to large multinational companies, says Doug Roberts, the chief investment strategist at ChannelCapitalResearch.com, and the author of “Follow the Fed to Investment Success.” For years, investors have assumed that multinationals that can produce goods with cheap overseas labor have a built-in advantage; taxing overseas income could level the playing field for smaller companies that make things at home, Roberts says.

The effects of that proposal to tax overseas income could significantly reshape industries where many companies have operations abroad, like the garment, auto, and information-technology industries, strategists say. It would change the calculation for corporations deciding whether to locate a new plant at home or abroad, says Kevin Mahn, the president and chief investment officer of Hennion & Walsh. But “some companies in an industry might be better-positioned than others,” so investors would have to do a company-by-company analysis to find winners and losers, Mahn says.

Should the plan pass, there would be one certain winner, Mahn says: Accountants. “Any time there’s a change in tax policy, there’s a need for corporations to use experts to understand the changes,” he says.